Here’s Why Schlumberger Could Gain 70%

By Ben Levisohn

Schlumberger guided earnings to grow at a 17-20% [compound annual growth rate] to $9-10/sh by 2017, ahead of our current estimate of a 15% [compound annual growth rate]. However, the company’s estimates are based on just a 6% industry spending growth level, which is about in line with our long-term expectations of 4-6%.

Schlumberger has historically converted 30% of its EBITDA or 75% of [earnings per share] into free cash flow, meaningfully above that of its peers, while trading at a free cash flow yield of 2-4%. Currently shares are trading at the high-end of the range making valuation compelling. Applying a conservative 3.5% yield to the company’s 2017 EPS estimate of $9-10/sh, its 75% free cash flow conversion and discounting it back 2 years at 10%, we arrive at our new $168 PT. If Schlumberger is able to bring this growth 6-12 months forward and its free cash flow yield approaches its historical 3% average, we arrive at our $200 bull case.

While Schlumberger has a free-cash-flow yield of about 3.5%, Cameron International’s (CAM) and Dril-Quip’s (DRQ) are just over 3% and FMC Technologies‘ (FTI) is just under 3%. Halliburton (HAL) has a free-cash-flow yield of just over 1%.

Shares of Schlumberger have gained 2.1% to $116.19 at 2:06 p.m., while Cameron has doped 0.78% to $66.71, Dril-Quip has fallen 1.1% to $105.62, FMC Technologies has declined 2.2% to $60.20 and Halliburton is up 0.2% at $69.57.

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The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.